DELIVERY OF GOODS ON HIRE PURCHASE / INSTALLMENT.

[Dr. Sanjiv Agarwal]

According to section 66E(g) of the Finance Act , 1994, as inserted   by Finance Act, 2012, activities in relation to delivery of goods on hire purchase or any system of payment by installment is a declared service and liable to service tax.

Meaning of Terms

Hire-purchase

According to Advance Law Lexicon, hire purchasing is a system by which goods are obtained on hire. This becomes the absolute property of the hirer on paying the last of the installment stipulated to be paid by him but until then he cannot deal with the goods, having no ownership in them

According to Wikipedia, hire-purchase is the legal term for a contract, in which persons usually agree to pay for goods in parts or a percentage at a time.

According to Oxford Dictionary, hire purchase is a method of buying an article by making regular payments for it over several months or years.

Financial Leasing

“financial leasing” means a lease transaction where—

(i) contract for lease is entered into between parties for leasing of a specific asset;

(ii) the contract is for use and occupation of the asset by the lessee;

(iii) the lease payment is calculated so as to cover the full cost of the asset together with the interest charges; and

(iv) the lessee is entitled to own, or has the option to own, the asset at the end of the lease period after making the lease payment.

According to Accounting Standard (AS 19) issued by the ICAI, a finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset. Operating lease is a lease other than a finance lease.

Scope of ‘delivery’ of goods on hire-purchase or on any system of payment by installments.

Section 2 of the Hire-Purchase Act, 1972 defines a “hire purchase agreement’ as ‘an agreement under which goods are let out on hire and under which the hirer has the option to purchase them in accordance with the terms of the agreement and includes an agreement under which-

(i) possession of goods is delivered by the owner thereof to a person on condition that such person pays the agreed amount in periodical installments, and

(ii) the property in the goods is to pass to such person on the payment of the last of such

installments, and

(iii) such person has a right to terminate the agreement at any time before the property so passes.’

As per the Sales of Goods Act by Mulla (Seventh Edition. Page 14) delivery is ‘voluntary

dispossession in favour of another’ and that ‘in all cases the essence of delivery is that the deliveror, by some apt and manifest act, puts the deliveree in the same position of control over thing, either directly or through a custodian, which he held himself immediately before the act.

The nature of such arrangements has been explained by the Supreme Court in the case of Association of Leasing & Financial Service Companies v. Union of India [2010 (20) S.T.R. 417 (S.C.)]. The relevant extract in para 20 of the said judgment is reproduced below:

“20. According to Sale of Goods Act by Mulla [6th Edition] a common method of selling goods is by means of an agreement commonly known as a hire-purchase agreement which is more aptly described as a hiring agreement coupled with an option to purchase, i.e., to say that the owner lets out the chattel on hire and undertakes to sell it to the hirer on his making certain number of payments.”

Key ingredients of the deemed sale category of ‘delivery of goods on hire-purchase or any system of payment by installments’, therefore are-

• Transfer of possession (and not just of custody)

• The hirer has the option or obligation to purchase the goods in accordance with the terms of the agreement.

In a mere hiring agreement the hirer has no option to purchase the goods hired and the risks and rewards incidental to ownership of goods remain with the owner and are not transferred to the hirer. In a hire-purchase agreement the hirer has an option or an obligation to purchase goods.

The delivery of goods on hire-purchase or any system of payment on installment is not

chargeable to service tax because as per Article 366(29A) of the Constitution of India such delivery of goods is deemed to be a sale of goods.

Financial lease, operating lease and equipment lease will be covered under this category only if such leases have the ingredients as mentioned above.

The difference between loan, hire-purchase and leasing can be summed up as follows—

Criteria	Loan	Hire-purchase	Leasing
Ownership	Borrower is the owner	Financier is the owner	Lessor is the owner
Relationship	Lender- borrower	Owner hirer	Lessor lessee
Buyer	Borrower buys the equipment / vehicle	Owner purchases and supplies to the hirer	Lessor purchases and supplies to the lessee
Compensation	Interest	Hire charges	Lease rent
Depreciation	Claimed by borrower	Claimed by hire	Claimed by lessor
Repayment	Principal and interest and paid in installments	Hire charges paid in installments	Lease rent paid periodically
Insurance	At borrower’s cost	By owner	By lessor

Deemed Sales & Taxability of Related Services

The six categories of deemed sales as defined in article 366(29A) of the Constitution are also included in the term sale since these transactions have been deemed to be a ‘sale’ in the Constitution itself. These are –

• transfer, otherwise than in pursuance of a contract, of property in any goods for cash,

deferred payment or other valuable consideration

• transfer of property in goods (whether as goods or in some other form) involved in the

execution of a works contract

• delivery of goods on hire-purchase or any system of payment by installments

• transfer of the right to use any goods for any purpose (whether or not for a specified

period) for cash, deferred payment or other valuable consideration

• supply of goods by any unincorporated association or body of persons to a member

thereof for cash, deferred payment or other valuable consideration

• supply, by way of or as part of any service or in any other manner whatsoever, of

goods, being food or any other article for human consumption or any drink (whether or

not intoxicating), where such supply or service, is for cash, deferred payment or other

valuable consideration.

It has been held by Supreme court in the case of Association of Leasing & Financial Service Companies v. Union of India [2010 (10) TMI 4 - SUPREME COURT OF INDIA] that in equipment leasing/ hire purchase agreements there are two different and distinct transactions, viz., the financing transaction and the equipment leasing/hire-purchase transaction and that the financing transaction, consideration for which was represented by way of interest or other charges like lease management fee, processing fee, documentation charges and administrative fees, which is chargeable to service tax. Therefore, such financial services that accompany a hire-purchase agreement fall in the ambit of this entry of declared services.

Levy of Service Tax on which Amount

Service tax will not be leviable on the entire amount of interest and other charges received in relation to hire-purchase. In terms of the exemption notification relating to such activities, service tax is leviable only on 10% of the amount representing interest. No exemption is available in respect of other charges. Notification No 13/2012-ST dated 17.3.2012 provides for the same in relation to financial leasing services including equipment leasing and hire purchase.

 

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